Don't expect Visa to charge up financial ETFs

JohnSpence

BOSTON (MarketWatch) -- Visa may not be everywhere investors want it to be.

Despite Visa Inc.'s multibillion-dollar global credit-card business and the largest initial public offering in U.S. history, the company won't immediately join sector exchange-traded funds, which are becoming increasingly popular tools for expressing a view on volatile financial stocks, experts say.

"Like MasterCard before it, Visa will eventually get scooped up by a number of ETFs," says Jeff Ptak, Morningstar Inc.'s director of exchange-traded securities analysis.

"But investors salivating at the thought of jumping on the Visa bandwagon by investing in an ETF are likely to come away disappointed -- it'll take a while for the stock to enter the indexes that these funds track," Ptak wrote in a research note.

The Visa
V, -0.26%
IPO last week raised about $18 billion when the shares priced at $44, above the expected range. The stock jumped 28% on the first day of trading, but was off more than 7% for Monday's session to $59.73. Read more on the Visa IPO.

Still, it could be some time before Visa makes its presence felt in financial ETFs, which have attracted significant trading volume during the credit crunch as a way to jump in and out of the sector that's been badly shaken by the turmoil in credit markets. Equity ETFs are essentially baskets of stocks that trade like individual securities. Similar to index funds, the buy and sell decisions are determined by the tracking benchmark rather than a portfolio manager choosing stocks.

The fund, which breaks out the financial stocks from the S&P 500 Index
SPX, +0.31%
is off about 9% over the past three months as the sector has been pulled down by further mortgage write-downs at pressured brokerage firms and investment banks.

MasterCard

In May 2006, Visa's credit-card rival MasterCard
MA, -0.37%
raised more than $2 billion in another of Wall Street's biggest IPOs. Like Visa, MasterCard enjoyed a first-day pop, rising 18% during the opening session. See archived story.

Yet with a market cap of about $30 billion, MasterCard still hasn't cracked the S&P 500, which means it's not in the Select Sector SPDR Financial. The index custodian, Standard & Poor's, requires IPOs to be "seasoned" for six to 12 months before being considered for addition to the S&P 500, which most investment professionals use to measure U.S. stocks.

MasterCard didn't show up in the iShares Dow Jones U.S. Financial Sector ETF
IYF, -0.33%
until September of 2006, or several months after its IPO, according to Morningstar's Ptak. As of March 20, MasterCard represented only about 0.6% of the ETF's assets, according to Barclays Global Investors. The ETF has 292 financial stocks. The Select Sector SPDR Financial ETF's portfolio holds fewer with 93 names, according to State Street Global Advisors.

Visa shares could go into Vanguard Group ETFs tracking indexes from MSCI first because the benchmarks have less-stringent inclusion criteria for IPOs, said Ptak.

He pointed out MasterCard surfaced for the first time in Vanguard Information Technology ETF's
VGT, +0.28%
portfolio shortly after the IPO. The index provider, MSCI, considers MasterCard a technology stock. With a market cap of around $50 billion, he expects Visa could be added to this ETF as soon as the first week of April.

Whether MasterCard and Visa should be classified as tech or financial stocks makes for an interesting debate. However, when it comes to investing in sector ETFs, individuals should probably stay focused on the big picture.

"It goes without saying that it's unwise to invest in an ETF for the sole purpose of gaining exposure to one or two holdings," Ptak said.

Not surprisingly given the ETF boom, investors do have at least one option for investing in a basket of IPO stocks: First Trust IPOX-100
FPX, +0.18%
The fund has an expense ratio of 0.6% and trades on the American Stock Exchange.

Through March 19, the IPO ETF was off about 6% over the previous 12 months, trailing the S&P 500 by 2 percentage points, according to Morningstar.

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